US Markets as Foreign Policy

Financial Times, 14 July 2000
By Thomas Catn

When companies or countries around the world are in need of capital, chances are many will
come to New York.

To those in good standing, financing on Wall Street comes at a good price with few
conditions
attached.

Now, attempts are being made to take advantage of Wall Street’s role as banker to the world
to
enforce Washington’s foreign policy. The US Senate is preparing to vote on a bill that would
impose curbs on China’s access to US capital markets if it were found to be aiding the
proliferation of weapons of mass destruction.

At their most severe, the sanctions would prevent any Chinese company or individual from
raising money on US capital markets – whether in the form of stocks, bonds or bank loans.

The bill, co-sponsored in the Senate by Republican Fred Thompson and Democrat Robert
Toricelli, has some powerful backers, including Senator Trent Lott, the Senate majority leader.
Its chances of passing were boosted recently after reports that US intelligence services had
evidence that China was continuing to help Pakistan in developing its missile programme.

Nevertheless, the bill is staunchly opposed by the White House. Members of the National
Security Council have met the senators pushing the bill to outline their objections. Among them
is the fact that the sanctions are mandatory and single out the Chinese for punishment.

“The Chinese would clearly see this as directed against them, and that would limit our ability
to
engage them in the future,” said Philip Crowley, spokesman for the National Security Council. If
the bill were to be passed – and that is by no means certain – it would set an important precedent,
marking the first time the US aimed to use its markets as a foreign policy tool.

“What’s important here is that this represents the first time in legislative history where capital
market sanctions are offered as policy options for the president,” said Roger Robinson, the
chairman of the William J. Casey Institute, a think-tank focusing on international economics and
national security and a strong supporter of the bill.

In fact, the bill is only one of several moves in this area. Republican Senator Sam
Brownback of
Kansas is understood to be preparing legislation that would require foreign companies wishing to
offer stock or bonds in the US to make a series of additional disclosures to the Securities and
Exchange Commission, including more information on their parents, subsidiaries and affiliates.
One of the intentions is to allow investors to identify companies associated with human rights
violations or national security concerns.

In California, a bill has passed both houses to create a task force to review the foreign
investments of state employees’ and teachers’ pension funds for national security and human
rights concerns. Other states are considering similar audits.

Proponents of using capital markets to put pressure on nations have been encouraged by the
campaign against the initial public offering earlier this year by PetroChina, the Chinese
state-owned oil company, whose activities offended a range of groups. Campaigners persuaded
public-sector investors to shun the share issue, including Calpers and TIAA-CREF, one of the
world’s
largest pension funds. In all, opponents claim to have persuaded investors with more than
$1,000bn in funds under management to boycott the share issue.

PetroChina was forced to scale back its offering to $2.9bn, but by how much is still a matter
of
debate. The self-styled “PetroChina coalition”, which met in Washington last month to digest
lessons learnt from the campaign, says the company had planned to raise up to $10bn. People
close to Goldman Sachs dispute this figure, saying they never hoped to raise more than $5bn.

Proponents of using capital market sanctions say they offer a targeted economic tool that
avoids
“collateral damage” to US companies. In contrast, the four-decade trade embargo against Cuba
has pointedly failed in its objective of toppling Fidel Castro and has cost US businesses untold
opportunities.

Critics say such sanctions would scare off foreign companies and imperil the very supremacy
of
the US capital markets that they aim to leverage. Moreover, companies would merely go
elsewhere. “We strongly oppose this type of routine use of capital markets restrictions as a tool
of economic sanctions,” said a US Treasury official. “Open access to US capital markets has for
a long time been a cornerstone of US policy. Sanctions would risk damaging confidence in US
markets and would be unlikely to change China’s behaviour.”

Those who stand to lose most are the big underwriters, who make hefty fees from bringing
foreign companies to market. Goldman Sachs, the investment bank which acted for PetroChina,
may have been the first to have to deal with opposition from non-financial concerns, but it is
unlikely to be the last. “I would say it’s inevitable, given the role that finance plays in the world
today that underwriters are going to have to deal with these kinds of circumstances in the future,”
said John Rogers, a managing director at Goldman Sachs.

There are about 20 state-owned Chinese enterprises waiting in the wings to raise capital
offshore,
including Baosteel, China’s largest steel company; Sinopec, the second largest oil company; the
China National Offshore Oil Company, another state oil concern; and a financial holding
company assembled by Citic, the leading state investment trust company.

Any one of these could be a target for protesters. However, the leading candidate is emerging
from the bond market. According to Mr Robinson, whose institute helped bring together the
PetroChina coalition: “The next Chinese sovereign bond offering could represent the kind of
undisciplined “blank cheque” financing for a questionable government which the PetroChina
coalition may unite to oppose.”